Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Stocks Are Hostages to China Trade Deal
Duarte in the Money Options
Federal Reserve’s money pumping operations into the repo market have
kept the stock market from embarking on a downtrend, yet the big elephant
in the room remains the U.S.-China trade war, which means that aside
from the usual potential potholes -earnings, the Fed, and politics in
general- the major influence on stock market volatility these days remains
the daily trade war news grind.
Indeed, complex adaptive systems such as the Markets-Economy-Life
ecosystem (MEL), by nature, are fluid entities whose most dramatic
moves begin at a place that physicists call “the edge of Chaos.” This
is where Order and Disorder collide and the forces of Complexity, the
ruling force of all systems in the Universe, take over and events emerge
onto their next behavioral phase. Moreover, that’s precisely where
the financial markets stand as we head into the last five weeks of
2019, at the edge of Chaos.
Kohl’s Crashes into Chaos as Pfizer Closes in on Emergence
A few weeks ago, it seemed as if the stock market was about to power
much higher, but last week’s action proved that yet again the unpredictability
of events is at extremes. For example, take the drubbing in shares
of retailer Kohl’s (KSS), which I profiled in a positive light here
last week, albeit with a caveat when I noted: “I do suggest a bit of
caution as KSS reports earnings on 11/19. And even though the current
trading pattern suggests that investors are expecting good news, keeping
a well placed sell stop under any shares will help you sleep at night
especially if KSS delivers a negative surprise in the report and the
shares get crushed.”
Of course we all now know that Kohl’s got crushed as it missed its
earnings and revenues while downgrading its future guidance. That the
company missed badly suggests that despite its best efforts, its business
model is not working, and that its attempt to be the next Amazon.com
isn’t measuring up. Kohl’s failed its encounter with Complexity and
is now well into Chaos territory, where the trading pattern is no longer
reliable and is instead predictably unpredictable.
Accordingly, it seems logical to consider that what happened to Kohl’s
can happen to any stock at any time in the not too distant future,
as the Markets Economy Life (MEL) ecosystem starts to consider the
general outlook for the future in an increasingly uncertain world.
Consider that people make financial decisions based on how the interaction
between the stock and bond markets along with Federal Reserve policy
affects the value of their 401(k) plans and their ability to borrow
money through the home equity lines of credit.
Customers make financial decisions based on the information that’s available
at the time of transaction such as the price, quality, and general quality
of merchandise they find at department stores along with their own financial
situation. So, in this case, clearly something didn’t add up which means
that even if Kohl’s stores may be full, the company’s results are more
about whether enough people are making purchases while they are in the
store or are plugged into their app. Furthermore, this seems like a KSS
problem, not a retail problem given the positive results from rivals
Target (TGT) and JW Nordstrom (JWN).
And while we can parse the retailing sector’s recent fate, shares
of the pharmaceutical sector’s biggest wallflower Pfizer (PFE) continue
to edge closer to a reversal of fortune as the stock is nearing a test
of its 200-day moving average.
As I noted in my recent article, Pfizer’s shares have languished
of late as it lost its patent on its blockbuster nerve pain drug Lyrica
and made some questionable decisions such as trying to launch a long
acting morphine tablet into a crowded market just as the opioid war
was starting to heat up. Moreover, I also noted that there were some
interesting pipeline and active drug developments that were worth noting,
such as its Eliquis blood thinner and its growing Biosimilar (generic
biotech drugs) portfolio along with a heart drug failure drug (Vyndagel)
for the treatment of what may not be as rare a form of the disease
as previously thought.
Moreover, it’s starting to become evident that Pfizer’s cancer drugs
are gaining ground as Inlyta has been approved for combination treatment
with Merck’s (MRK) blockbuster Keytruda in certain forms of renal cancer
while PFE’s CDK inhibitor Ibrance delivered $1.3 billion in global
sales in the most recent quarter.
The shares are indeed starting to gather some
momentum and there may be some further good news ahead if the FDA expands
the indications for Xtandi, a drug that blocks testosterone in advanced
cases of prostate cancer. The decision date is expected sometime in
If you are intrigued as to how to use the inner workings of Complexity
in your trading come see me at the February 2020 Money Show in Orlando
where I will be discussing the ins and outs of the Markets-Economy-Life
ecosystem (MEL) in my presentation titled “Trading at the Edge of Chaos”
and how I use it to pick winning stocks. Attend
free to watch my presentation, meet me up-close and personal,
and ask your most pressing questions. Discover the best investing and
trading opportunities and learn how to adjust your portfolio and strategies
for 2020’s unique market conditions. For information on how to register
and details on the presentation go HERE.
Advance-Decline line is in No Man’s Land
The New York Stock Exchange advance decline line (NYAD) has been the
most accurate indicator of the stock market’s trend since the 2016
presidential election, which is why I feature it in every one of my
Market Summary columns. Moreover, in the last few weeks it has been
signaling a steady uptrend in prices by making at least one new high
Unfortunately that pattern changed on the week ending 11/22/19. Certainly,
NYAD is not signaling a bearish trend at the moment. But what’s troubling
is that it seems to have lost a bit of its recent momentum, which means
that if we don’t get a new high in the next few days, and the current
pattern persists, we may be close to a meaningful pullback in stocks
before the year is over. For now, if NYAD can hold above its 50-day
moving average the uptrend remains intact.
individual stocks are still getting wrecked on news, which suggests
that if the economy slows, the bad news will spread.
Meanwhile, the U.S. Ten Year note yield (TNX) is trading in a tight
range between 1.75 and 1.98%.
A move above that 1.98% area could take the yield to a test of 2.1%.
If that level is taken out, I would expect some very large amounts
of handwringing and outright selling in the stock market.
Things could get Dicey unless the U.S. and China Come up
with Some Good Trade News
Complexity is a fluid force so we must be ready for anything in the
next few days to weeks. At the moment, however, the stock market looks
worn out and perhaps it’s just tired of waiting for a U.S.-China trade
deal. I’m thinking that at this point any deal would be better than
no deal. Moreover given the mixed earnings in retailing these days
and no huge pop in PMI or other economic data, there may be some pockets
of the economy that are softer than what even soft data suggests.
As a result, this is a good time to be a bit more cautious, but not
all out bearish as too many things could change in a hurry and we may
be off to the races again in a heartbeat. Certainly it’s worth keeping
shares that are working, and to continue to have a handy shopping list.
But it’s also not a bad time to bring back some hedges and to take
some profits on any big gainers left in portfolios.
Finally, the Thanksgiving trading week tends to be quiet, which means
that if the U.S. and China decide to turn on the good news flow this
week, it is possible that stock prices could move decidedly higher,
albeit on lower than usual volume.
Joe Duarte is a former money manager, an active trader and a widely
recognized independent stock market analyst since 1987. He is author
of eight investment books, including the best sellingTrading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading
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